LONG TERM
It's been another interesting week in the gold markets but I see real danger signs in the recent activity, however, let's leave that for the short term analysis and get on with the longer term view. Looking at my long term P&F chart there has been no movement this past week. As the chart stood last week so it is this week. It still looks like that $580/$600 projection level is not far away. However, there may be a little stumbling block along the way that might cause the level to be reached a little later than a little sooner. For one, the political situation in the Middle East could just cool down a little bit and that might be all it takes for the price of gold to temporarily drop. Will that happen? Hell if I know but it is a possibility one should consider. Another troubling event that I had mentioned in the past is the level of the long term momentum indicator, represented by the 30 Week RSI on the chart. Twice before, since the gold bull market started, the momentum indicator was at this high level and at another time it was close but just below this level. In all three previous cases the price of gold peaked at the year end, plus or minus a few weeks. In all three previous cases it took most of the year for the price of gold to meander lower or move in a lateral trend before breaking into new highs. Although the long term remained bullish throughout one should consider this possibility if one is looking to do some long term investing at this time.
Keeping in mind that trend following means that very often you know a trend has turned after it has turned, you do not KNOW that a trend will turn ahead of time. Of course the indicators are there to WARN of a possible turn but that is not the same as actually turning. Having said all that let's see what the indicators are telling us about the long term.
First and foremost, the price of gold is well above its long term moving average line with the line pointing aggressively upward. Nothing here to suggest an imminent reversal of trend. As for the price momentum, well other than the comments above, momentum is still quite positive although having difficulty keeping up with the new highs in the gold price. The volume indicator, although starting to close up on its moving average line, is still above the line for a confirmation of price trend.
Putting the long term indicators together we still have a BULLISH long term consensus but are starting to worry about that momentum indication.
INTERMEDIATE TERM
Starting, as I always do, with the P&F chart, the chart above shows a topping or lateral drift action. A new support and potential reversal level is now indicated at the $545 level with a move to $540 being the breaking of support. That may or may not break below the up trend line for a new bear signal as we might need a little more sideways activity for that to happen on the support break. This P&F chart would suggest a target price of $505 on the break but we'll have to confirm that when it happens.
As for the usual indicators the price is still some distance from its positive moving average line, no reversal here yet. The troubling indicator as mentioned last week is the price momentum indicator. It continues to show weakness with its negative divergence versus price action. The momentum trend seems to be very much like a reverse saucer pattern and is now in the right hand downward sloping part ready to break into new very recent lows. The other troubling indicator, again as mentioned last week, is the accelerating Merv's Bearish FAN Principle trend lines. This third trend line, often referred to as a "blow-off" stage is just about to be breached on the down side. Once the line is breached with a close below the line it's the end of the bull trend for some time. That close will now come at the $555 level, increasing slightly each day as time progresses. There are very, very few times I would be inclined to call a trend REVERSAL on only one indicator but the breaking of the third accelerating bearish FAN trend line is one such time. So, should the price action close below $555 that would be an intermediate term bear market call as far as I am concerned, unless the action then suggests the call was erroneous (which any call could be, nothing is ever perfect). Note that this seems to go hand in hand with the concerns raised in the long term analysis earlier. One can draw that third FAN trend line from the Dec 21st low through the Jan 19th low. Finally, a look at the volume indicator suggests that the volume indicator has now gone negative by moving below its moving average line. That line is still slightly positive in slope so maybe it is more appropriate to consider the volume indicator as neutral. The short term analysis of the daily volume action has more interesting features about the volume which may nail the top.
It is sometimes dangerous to get too enamored with volume information. Gold futures are traded in more than one market. They are also traded around the clock in markets of Europe, the Middle East, Africa, Asia, etc. So, one rarely has an "accurate" idea of total daily volume of trading. My experience has been to go for the market information where the trading is the heaviest and market information the easiest to obtain. But stay consistent.
All in all the intermediate term is still BULLISH but very, very close to reversing. Not the time for making new buy side commitments.
SHORT TERM and IMMEDIATE TERM
Short term and Immediate term analysis is found in the subscriber's section of Merv's Precious Metals Central.
A pretty good week for gold stocks as the various North American Indices racked up gains of anywhere from 6.8% to 2.6% -- 2.6% ?? something looks fishy. Once more the Canadian S&P/TSX Gold Index shows an extreme underperformance versus the other major North American Indices. On a one week basis this difference is striking. Checking the currency fluctuations, even that does not account for the difference in performance. Taking a quick look at the stock performances this also does not explain it. A mystery! I think I'll look into this a little more in detail during the week. In the mean time let's look in on the AMEX Gold Miners Index.
The AMEX Gold Miners Index is a relatively new gold Index reflecting about 40 gold stocks. It is a "modified market capitalization weighted" Index, as the AMEX web site mentions. Looking over the stocks in the Index and their past week's performance we see that Newmont Mining with a gain of only 4.6% on the week had an effect on the Index value that was still 5.6 times greater than the effect that Metallica Resources had with its 31.0 % gain on the week. 6.7 times the gain but still negligible effect on the Index. I can never understand as to why they even have stocks such as Metallica in an Index if their contribution to the calculation of the Index is miniscule and could be neglected with no effect. Is it just for show, that they have 40 stocks in the Index?
The Index seems to be moving right along hitting new highs and well above its various moving average lines. Momentum is positive but seems to be starting to under perform the Index in the past few days. It just seems to have stalled and is having difficulty reaching new highs along with the Index. Something is warning me that a reversal of trend could not be far behind. Dangerous time to be making new purchases in this sector.
Well, there was no gain as low as 2.6% but the gains in the various Merv's Indices really were all over the place from a low of 6.0% to as high as 15.3% on the week. Silver was the real winner with both silver Indices having gains in the double digit levels.
MERV'S GOLD & SILVER 160 INDEX
The overall universe of 160 precious metal stocks did quite well with an average gain of 7.2% on the week. With 127 gainers and only 31 losers on the week, the gains were quite general in nature. There were 5 stocks in the plus or minus over 30% category, quite respectable speculation without really overdoing it.
The week's best gainer was MAG Silver with a weekly gain of 53.2%. MAG has been rated as POS in our table of technical information and ratings since first included in the list on 23 Dec 2005. At that time it was at $1.32, that reflects a gain of 138% in one month.
Since the bottom in May the overall average performance of these 160 precious metal stocks has been 90%. As you can imagine some performed a whole lot better and some not. The quality stocks were the slightly poorer performers while the speculative silver stocks were by far the spectacular performers. On an average the 25 Spec-Silver stocks gained some 140% during the same time period. Will the gain continue? Stay tuned.
MERV'S QUAL-GOLD INDEX
The 30 quality stocks in this Index gained on average 7.2% on the week, the same as the overall universe gain. With 29 gainers and only 1 loser the performance was quite impressive (for quality). The sole loser was Barrick with a loss of 0.2%. This was probably the reason that most major North American Gold Indices performed worse than the Merv's Indices. Barrick is very heavily weighted towards the calculation of most of those Indices.
Looking at the chart of Merv's Qual-Gold Index in the subscriber's section one notices that the intermediate term momentum indicator is just about touching its overbought line. The last time it was up that high was in late 2003 just before the Index topped out and went into 2 years of lateral motion. A warning that we may not be that far from another top and further purchases of stock may carry a more than normal risk of under performance.
MERV'S SPEC-GOLD INDEX
This top tier of the speculative category (i.e. just below the quality) was the group with the lowest performance of the Merv's Indices this past week with an advance of only 6.0%. Nothing much stands out on a review of the stocks. It was just a few more losers on the week that caused a lower group performance. Here too, one must be cautious about further purchases as the momentum indicator IS inside its overbought zone. As with the Qual-Gold Index the last time it was that high was shortly before reaching its high in early 2004 and going into a 2 year lateral trend.
MERV'S GAMB-GOLD INDEX
The best performer of the general gold and silver Indices with a gain of 9.1% on the week the Gamb-Gold Index is up some 90% since the May lows. However, if the present list of stocks were included since May the advance would be in the order of 170%. The momentum indicator is inside its overbought zone but not quite at the level it reached in late 2003 just before the Index reached a temporary top. Everything seems to be suggesting that there is not much upside left for the gold stocks on this latest thrust.
MERV'S QUAL-SILVER INDEX
The underwhelming performer for many months this Index took a sharp turn to the up side this past week with all 10 component stocks gaining ground for an average of 13.3% on the week. Silver itself seems to have taken off by breaking through a resistance level and projecting to the $12.20 level. With gold looking like it may be topping out silver may be the place to be over the next while. However, silver does have a tendency to follow gold so one should beware.
MERV'S SPEC-SILVER INDEX
The best performer of all the Indices the Merv's Spec-Silver Index gained 15.3% on the week - WOW. The best stock performer of the 160 universe, MAG Silver, is in the Index as well as 2 other plus 30% performers. There were 2 losers in the Index so it was not clear sailing for all the stocks but you can't always ask for perfection. This Index is now up some 140% since its low last May.
Well, that's it for this week.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
30 January 2006
During the day Merv. practices his engineering profession as a Consulting Aerospace Engineer. Once the sun goes down and night descends upon the earth Merv. dons his other hat as a Chartered Market Technician (CMT) and tries to decipher what's going on in the securities markets. As an underground surveyor in the gold mines of Canada's Northwest Territories in his youth, Merv has a soft spot for the gold industry and has developed several Gold Indices reflecting different aspects of the industry. As a basically lazy individual Merv's driving focus is to KEEP IT SIMPLE.
To find out more about Merv's various Gold Indices and component stocks, please visit www.themarkettraders.com and click on Merv's Precious Metals Central. There you will find samples of the Indices plus other publications of interest to gold investors.